valuation allowances

[nikko0355]

I am trying to make sense of valuation allowances.
To my understanding valuation allowance allow co to claim less deferred assets. So a co that claims more valuation allowance would be conservative. And a co that claims no valuation analysis is aggressive. Meaning they feel all of their future deferred assets will actually happen. Now concerning financial statements� if you claim valuation allowances.. does this lower your deferred assets? I am thinking yes.
Can anyone please help clarify..
Or even better give me a better explanation of this whole concept

 

[JoeyDVivre]

So the deferred tax asset is only an asset to the extent that eventually it will reverse itself. For example, a tax loss carryforward is only useful to the extent that you have future income from which to deduct it before it expires. If your company is going to see nothing but red in the next few years so the loss carryforward won't actually be used, then you book the tax asset and then make the contra account reflecting your beliefs that you won't be able to use some or all of it.

 

[no_tension]

a deferred tax is like a tax benefit. If you think you will not make enough taxable profit to claim this benefit then no point carrying your deferred tax further.
A tax benefit can be claimed only if you have sufficient profit.
But if you suffer losses then better to close your position by claiming a valuation allowance than to wait and use a deferred tax benefit.

 

[nikko0355]

thanks u 2.
i appreciate it.. now it is starting to make more seence..

so if you claim valuation allowance.. it does not have a direct impact on assets.. rather it has a impact on deferred assets.. so if i claim an allowance.. and then my asstes are realized then i am overstating my assets?

also is i claim no valuation allowance and my dereffed assets are realized then it has no effect?

 

[Dsylexic]

you are correct - in fact managers are known to manipulate the valuation reserve contra asset account -so that earnings can be smoothed.